Humana cuts 1st-qtr profit forecast by almost half

By Lewis Krauskopf

NEW YORK (Reuters) - Humana Inc <HUM.N> slashed its first-quarter earnings forecast by nearly half on Wednesday on high costs in its Medicare prescription-drug plans for the elderly, crushing its shares as the health-insurance industry was roiled for a second straight day.

Humana, which is one of the biggest Medicare plan providers, plummeted as much as 29 percent before paring losses as it also sharply lowered its full-year profit forecast.

That drop follows a 24.4 percent drop in Humana shares on Tuesday after rival WellPoint Inc <WLP.N> cut its 2008 forecast, in part because of high costs for its Medicare Advantage full-service plans.

Humana shares tumbled as low as $33.69, their lowest point since May 2005. Humana shareholders have seen about $5 billion in market value wiped away in the past two days.

"The real concern is that if WellPoint has problems in Medicare Advantage, how come you haven't? And is it just a matter of time that they will?" said David Heupel, a portfolio manager at Thrivent Investment Management.

"No one is going to give anyone the benefit of the doubt in managed-care right now," Heupel said. "There are too many signs that things have deteriorated."

Health insurer stocks -- which had fallen broadly on WellPoint's lower outlook -- were jolted again on Humana's announcement, with shares of other major Medicare plan providers slumping in early trading.

But shares of companies like UnitedHealth Group Inc <UNH.N>, WellCare Health Plans <WCG.N>, Health Net <HNT.N> and Coventry Health Care <CVH.N> had largely recovered by the afternoon, as analysts said the issues applied specifically to Humana.

"Humana's significant negative earnings revision is completely due to its Medicare drug plans and should not impact other products or other companies," Wachovia analyst Matt Perry said in a research note.

Until this year, Humana had been a stock market star, with shares more than tripling from the end of 2003 to the end of last year. The company has capitalized on a federal expansion of Medicare, the U.S. government health program for the elderly.

Humana blamed its lower forecast on an error in designing its benefits for one of its Medicare plans that cover only prescription drugs. It lowered co-payments too much, shifting costs to the company.

The Louisville, Kentucky-based company forecast first-quarter earnings of 44 cents to 46 cents per share against its previous outlook of 80 cents to 85 cents. It projected full-year earnings of $4.00 to $4.25 per share compared with $5.35 to $5.55 previously.

Chief Executive Officer Michael McCallister told analysts on a conference call that the problems were "short term and correctable" and projected that the company's growth trajectory would resume in 2009.

Humana said it based its revised projections for its prescription-drug-only Medicare plans on analysis of pharmacy claims through February.

It cut its projection for full-year operating profit margin for all of its Medicare plans to about 3 percent from 5 percent.

Goldman Sachs analyst Matthew Borsch said Humana should be able to limit the damage from this problem to 2008 given the annual nature of Medicare drug plan bidding.

Humana said its full-service Medicare Advantage plans were not affected by the revision in its outlook, nor were its commercial plans for employers and military services business.

Wachovia's Perry said Humana's prescription-drug only Medicare plans represent about 10 percent of Humana's earnings and 15 percent of revenue.

The shares could recover quickly, Perry said, as company executives speak at investor conferences in the coming weeks and with first-quarter results about a month away.

Humana shares cut their losses, trading down $6.66, or 14.1 percent, at $40.72 in afternoon trade.

(Reporting by Lewis Krauskopf; editing by Mark Porter and John Wallace)